Why We’re Not Keen On Shutterstock, Inc.’s (NYSE:SSTK) 9.1% Return On Capital

Today we'll look at Shutterstock, Inc. (NYSE:SSTK) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In the end, ROCE is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Shutterstock:

0.091 = US$28m ÷ (US$513m - US$227m) (Based on the trailing twelve months to September 2018.)

So, Shutterstock has an ROCE of 9.1%.

Check out our latest analysis for Shutterstock

Does Shutterstock Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that Shutterstock's ROCE is fairly close to the Online Retail industry average of 9.1%. Aside from the industry comparison, Shutterstock's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Shutterstock's current ROCE of 9.1% is lower than its ROCE in the past, which was 13%, 3 years ago. This makes us wonder if the business is facing new challenges.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a freereport on analyst forecasts for Shutterstock.

How Shutterstock's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Shutterstock has total assets of US$513m and current liabilities of US$227m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. Shutterstock has a medium level of current liabilities, which would boost its ROCE somewhat.

Our Take On Shutterstock's ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. The ROCE can give us an idea of the quality of a business, but we need to look deeper if we are considering a purchase. One data point to check is if insiders have bought shares recently.

If you would prefer check out another company -- one with potentially superior financials -- then do not miss thisfree list of interesting companies, that have HIGH return on equity and low debt.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.